Applying constraints in ESG portfolio optimization can be done through exclusionary screening,

where certain sectors, companies, or activities are excluded based on ESG criteria. This is one of the

most common methods used by investors to ensure that portfolios align with ESG objectives.ESG

Reference: Chapter 9, Page 505 - Investment Mandates, Portfolio Analytics & Client Reporting in the

ESG textbook.

ESG assessments of fund managersvary widelybecause different providers useproprietary

methodologies, data sources, and weightings. There isno universal standardfor measuring ESG

integration across asset managers, leading to inconsistencies in ratings.

For instance,MSCI, Sustainalytics, and FTSE Russellall have different scoring models, leading to

variations in ESG rankings for the same fund manager.

Reference:

Principles for Responsible Investment (PRI) Guide on ESG Evaluation

CFA Institute ESG Integration Framework

MSCI vs. Sustainalytics ESG Rating Methodologies

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The CFA UK ESG manual explains that scorecards are acustomizable toolthat allow analysts

totranslate qualitative insights into structured, numerical assessments. They are particularly useful

where third-party ESG ratings are unavailable, such as with private companies or sovereign entities.

“Scorecards can be used to assess ESG risk and opportunity… A custom ESG self-assessment tool that

reflects the sector-specific risk issues… is created… These scorecards translate qualitative judgments

into numerical scores.”

Thus, scorecards are flexible tools, usable for both private companies and sovereigns, making option

B the most accurate.

Reference:CFA UK Level 4 Certificate in ESG Investing – Official Training Manual (2021), Chapter 7:

ESG Analysis, Valuation and Integration, Section 7.1.6

TheJevons paradoxoccurs whenincreased efficiency in using a resource leads to a higher overall

consumption of that resourcerather than a decrease.

Example:As fuel efficiency improves in cars, people maydrive more, increasing overall fuel

consumption.

This effect can reduce the expected benefits of energy efficiency measures.

Option A relates to climate economics but does not describe the Jevons paradox.

Option C describes the albedo effect, not Jevons paradox.

Reference:

Jevons,

W. S. (1865)The Coal Question

OECD Report on Energy Efficiency & Consumption Trends

CFA Institute ESG Investment Risks & Resource Efficiency

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TheInternational Corporate Governance Network (ICGN)requirescomprehensive engagement

reporting, which goes beyond justvoting activity. Investors must discloseengagement outcomes,

stewardship efforts, and ESG considerations in investment decisions.

PRI signatories (A)must submitmandatoryESG reports, not voluntary ones.

Disaggregating ESG drivers (C)is actuallymore difficult, as ESG factors are deeply interconnected.

Reference:

ICGN Global Stewardship Principles

Principles for Responsible Investment (PRI) Reporting Framework

UK Stewardship Code 2020

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Regime-switching modelsare used instrategic asset allocationtocapture shifts in market conditions,

such as economic recessions, financial crises, or climate-related disruptions. These models allow

investors toadjust portfolio allocations based on different market regimes.

They do capture fat tails (A),meaning they can account for extreme events.

They incorporate both historical and forward-looking data (B).

Reference:

CFA Institute Guide to Regime-Switching Models

MSCI Strategic Asset Allocation in ESG Investing

Principles for Responsible Investment (PRI) Risk Management Framework

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TheEU Sustainable Finance Disclosure Regulation (SFDR)mandatesESG-related disclosure

requirementsfor investment managers and financial advisors, ensuringtransparent reporting on

sustainability risks and ESG integration.

GDPR (B) is about data privacy, not ESG disclosures.

FCPA (C) targets anti-corruption laws, not sustainability reporting.

Reference:

European Commission SFDR Compliance Guide

CFA Institute ESG Disclosure & Regulation Report

Principles for Responsible Investment (PRI) ESG Regulatory Overview

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Both company size and locationaffect ESG disclosure quality:

Larger companieshavemore resourcesfor ESG reporting.

Companies in regions with strong ESG regulations(e.g., EU) mustdisclose more ESG datathan firms

inless regulated markets.

Reference:

CFA Institute ESG Reporting Standards

Global Reporting Initiative (GRI) ESG Disclosure Guide

Principles for Responsible Investment (PRI) ESG Data Analysis

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Competence greenwashingoccurs when a companymisrepresents its ESG knowledge or expertise,

such asoverstating the board’s sustainability qualifications.

Option C describes “selective disclosure” greenwashingrather than competence greenwashing.

Reference:

CFA Institute Greenwashing Risk Guide

Principles for Responsible Investment (PRI) ESG Transparency Report

EU Green Claims Directive

Regime switching models are used in finance to account for changes in the behavior of financial

variables under different regimes or states. These models help in capturing the effects of abrupt

shifts due to various factors, including economic changes, policy shifts, or market conditions.

Step 2: Key Characteristics

Historical Data: While historical data may be used, these models are not typically based solely on it.

Usage by Practitioners: Although useful, they are not the most widely used models among

practitioners.

Abrupt Changes: They are specifically designed to model abrupt changes in financial variables, which

can result from shifts in regulations, policies, or other macroeconomic changes.

Step 3: Verification with ESG Investing Reference

Regime switching models are crucial for understanding and modeling the impact of sudden

regulatory or policy changes on financial variables: "These models are effective in capturing the shifts

in market dynamics caused by changes in regulations and policies, providing a robust framework for

strategic asset allocation"​​​​.

Conclusion: Regime switching strategic asset allocation models are used to model abrupt changes in

financial variables due to shifts in regulations and policies.

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